January/February 2015

Bank/Finance: Debt Financing for Tech Companies That Do Not Have a Long Credit History By: Bukola Mabadeje

Small and medium size technology companies that do not To illustrate, suppose the borrower anticipates an have the benefit of a long credit history are often faced approximate dollar amount of receipts from its contracts with a challenge when it comes time to obtain debt within a certain period of time. The lender would lend a financing. Traditional lending institutions look to a percentage of that expected income with the expectation company’s credit history to make credit decisions. Credit that the payment received would be used to pay off the history in turn is based on the historical cash flow of the loan. The lender also would perfect its security interest in company. Notwithstanding, there are alternative bases the accounts receivable by filing a financing statement at on which a lender could extend credit to a borrower that the appropriate State UCC filing office. either lacks or has an inadequate credit background. With a steady and sizeable portfolio of assets along with It is now fairly common for banks and other commercial the right lender, there may be an abundance of financing lenders to make loans without a long credit history of the sources available to the atypical borrower. borrower, as long as there are assets of the borrower which the lender can look to as a source of repayment and also as collateral in the event of failure to repay the loans. Bukola Mabadeje is an attorney in the firm’s Bank and Finance Practice Group in Such assets go beyond the obvious real estate assets, to the San Francisco office. She can be include less obvious assets like accounts receivable, reached at 415.227.3510 or equipment and inventory of a company, which could [email protected]. form the borrowing base of a loan, as well as the assets to which the bank may take a lien. The more readily convertible assets for such loans are accounts receivable—i.e. the income due to a borrower from any number of third party contracts for the supply of goods or services. A lender would simply appraise the value of such accounts receivable, and advance credit based on the expected income.

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